Assume that a firm has prepared the following cost estimates for the manufacture of a sub assembly component based on an annual production of 8,000 units.
Direct materials: Per unit: $5 Total: $40,000
Direct labor: Per unit: $4 Total: $32,000
Variable factory overhead applied: $4 Total $32,000
Fixed factory over head applied (150% of direct labor cost)
Per unit: $6 Total: $48,000
Total cost: Per unit: $19 Total: $152,000
The supplier has offered to provide the subassembly at a price of $16 each. Two-thirds of fixed factory overhead, which represents executive salaries, rent, depreciation, and taxes, continue regardless of the decision. Should the company buy or make the product?
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